The crisis facing Britain's car industry deepened today when Nissan announced plans to cut the 5,000-strong workforce at its Sunderland plant by 1,200.

The cutback will involve 800 permanent jobs and 400 temporary staff as the company, Britain's biggest car producer and exporter, bids to curb production in the face of falling demand.

The latest jobs blow came as the Bank of England's monetary policy committee cut interest rates to their lowest ever level in a bid to help boost the economy.

Lord Mandelson, the business secretary, is to meet representatives of the motor industry this month for further talks on the crisis facing carmakers and their suppliers, and yesterday's announcement will increase the pressure on the government to bring forward measures to help.

Nissan's plant is one of the most efficient in Europe, producing the Qashqai, Micra and Note models. Along with the other UK carmakers, Nissan has suffered a slump in sales in Britain and key export markets in mainland Europe.

The announcement came as new car sales fell to their lowest annual level since 1996. Total new registrations reached 2,131,795 in 2008 – 11.3% down on the 2007 figure, the Society of Motor Manufacturers and Traders (SMMT) said on Wednesday, and the organisation is predicting another sharp contraction this year.

Nissan said yesterday that it had already taken a number of measures to cut output by slowing the speed of factory lines and introducing non-production days.

The company warned that the outlook for the car market remained extremely challenging. Trevor Mann, senior vice-­president for manufacturing, said: "Like all manufacturers, Sunderland plant is currently operating in extraordinary circumstances not of our making. It is essential we take the right action now to ensure we are in a strong and viable position once business conditions return to normal.

"Unavoidably, this means we have had to make some very tough decisions in recent weeks. However, by doing so we are helping to safeguard our long-term future, which I believe is extremely positive.

"The long-term future of the plant must remain our overriding priority. However, as always, Nissan will continue to make every effort to minimise the impact on its employees and their families."

Derek Simpson, joint general secretary of the union Unite, said the announcement was "devastating news", showing "just how serious Britain's economic difficulties are". He added that it was imperative the UK protect its skills base or it would emerge weakened from the recession.

The industry has been urging the government to bring in measures to help stimulate demand by making credit and finance more easily available to dealers and car buyers.

Paul Everitt, SMMT chief executive, said the Nissan job losses emphasised the need for decisive action. "We said before Christmas that days and weeks mattered."

Companies were looking at 2009 and recognising that demand would be lower than in 2008. "People have been hanging on and hanging on to see what is available to help business. Where we are now is: 'How can we limit the damage?' "

Mandelson said the government would work with the north-east regional development agency to help workers affected secure new jobs as quickly as possible and with Nissan to bring new investment into the plant. "This is a highly skilled workforce that has many of the skills that the UK and worldwide industry will need as conditions globally improve," he said.

Asked whether he expected further job losses in the UK car industry, Mandelson replied: "I expect there will be, in view of the very sharp drop in demand for the cars. But the measures that will be taken by the companies will be to ensure their futures."

Shadow business secretary Alan Duncan said: "We regret these losses. The motor industry has been hit hard by a collapse in demand. There is no complete escape from Gordon Brown's recession.

"Our national loan guarantee scheme would help sectors like this get the credit support they so desperately need. Every day the government dithers and does not introduce our policy, more jobs are lost."

The Nissan plant occupies an historic place in UK car manufacturing. It was built during the tough times of the 1980s in one of the areas worst hit by unemployment and developed a reputation as one of the most efficient car plants in Europe.

A year ago it recruited 800 staff to cope with demand for the Qashqui. The company is planning to introduce a new model to the Sunderland plant – the sixth in seven years – a decision it said underlined the company's confidence in the north-east plant.